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Monday, May 29, 2023

Recession Watch Update

by Calculated Risk on 5/29/2023 12:06:00 PM

Way back in 2013, I wrote a post "Predicting the Next Recession. In that 2013 post, I wrote:

The next recession will probably be caused by one of the following (from least likely to most likely):

3) An exogenous event such as a pandemic, significant military conflict, disruption of energy supplies for any reason, a major natural disaster (meteor strike, super volcano, etc), and a number of other low probability reasons. All of these events are possible, but they are unpredictable, and the probabilities are low that they will happen in the next few years or even decades.
emphasis added
Unfortunately, in 2020, one of those low probability events happened (pandemic), and that led to a recession in 2020.
2) Significant policy error. Two examples: not reaching a fiscal agreement and going off the "fiscal cliff" probably would have led to a recession, and Congress refusing to "pay the bills" would have been a policy error that would have taken the economy into recession. 
That was written in 2013, and it appears once again that we've avoided the "default" policy error.
1) Most of the post-WWII recessions were caused by the Fed tightening monetary policy to slow inflation. I think this is the most likely cause of the next recession. Usually, when inflation starts to become a concern, the Fed tries to engineer a "soft landing", and frequently the result is a recession.
And this most common cause of a recession is the current concern.
Talk of a recession increased last year.  For example, from ECRI a year ago (May 26, 2022): Opinion: It’s time to prepare for a recession (ht SV).  However, I wasn't even on recession watch!

A key mistake some analysts are making is ignoring distortions caused by the pandemic.  See Pandemic Economics, Housing and Monetary Policy: Part I and Part II

In December 2022 I went on "recession watch" for only the 3rd time in the 19 years that I've been writing this blog, but I noted I didn't see a recession coming yet.  The other two times were in early 2007 (housing bust / financial crisis), and in March 2020 (pandemic).

In the FOMC Minutes released last Wednesday, the staff predicted a "mild recession" later this year:
The economic forecast prepared by the staff for the May FOMC meeting continued to assume that the effects of the expected further tightening in bank credit conditions, amid already tight financial conditions, would lead to a mild recession starting later this year, followed by a moderately paced recovery. Real GDP was projected to decelerate over the next two quarters before declining modestly in both the fourth quarter of this year and the first quarter of next year.
emphasis added
And the FOMC members have been essentially projecting a recession for some time (although they avoid using the word "recession"). Here are their March projections for GDP and unemployment.

GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1
Projection Date202320242025
Mar 20230.0 to 0.81.0 to 1.51.7 to 2.1
1 Projections of change in real GDP are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

Since Q1 real GDP growth was at 1.3% on a seasonally adjusted annual rate (SAAR) basis, and Q2 GDP is tracking 1% to 2%, the FOMC is essentially projecting GDP will decline over the last 2 quarters of 2023.

And on unemployment:

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2
Projection Date202320242025
Mar 20234.0 to 4.74.3 to 4.94.3 to 4.8
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

Since the unemployment rate was at 3.4% in April and depending on the growth of the civilian labor force in 2023, the FOMC is projecting between 800 thousand and 2 million jobs lost over the last two quarters of 2023.  That is a clear employment recession.

Two key leading economic indicators are suggesting a recession this year.

10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant MaturityOne of the leading indicators for recessions is the yield curve. Here is a graph of 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity from FRED.

Click here for interactive graph at FRED.

When the yield curve turns negative - the 2-year yields more than the 10-year - that suggests investors think interest rates will decline, usually indicating a coming recession.  However, economist Campbell Harvey (yield curve inventor) noted last year:
My yield-curve indicator has gone Code Red. It is 8 for 8 in forecasting recessions since 1968 —with no false alarms. I have reasons to believe, however, that it is flashing a false signal.
The yield curve has now inverted for a ninth time since 1968. Does it spell doom? I am not so sure.
One of my favorite models for business cycle forecasting uses new home sales (also housing starts and residential investment).  The purpose of the next graph is to show that these three indicators generally reach peaks and troughs together. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly.

Starts, new home sales, residential InvestmentThe arrows point to some of the earlier peaks and troughs for these three measures - and the most recent peak.

New home sales peaked in 2020 as pandemic buying soared.  Then new home sales and single-family starts turned down in 2021, but that was partly due to the huge surge in sales during the pandemic.   In 2022, both new home sales and single-family starts turned down in response to higher mortgage rates.   Residential investment has also peaked.

This decline in residential investment would usually suggest a recession is coming.

YoY Change New Home SalesThis third graph shows the YoY change in New Home Sales from the Census Bureau.  Currently new home sales (based on 3-month average) are up 4% year-over-year!

Usually when the YoY change in New Home Sales falls about 20%, a recession will follow.  An exception for this data series was the mid '60s when the Vietnam buildup kept the economy out of recession.   Another exception was in late 2021 - we saw a significant YoY decline in new home sales related to the pandemic and the surge in new home sales in the second half of 2020.  I ignored that downturn as a pandemic distortion (I am not a slave to any model).  Also note that the sharp decline in 2010 was related to the housing tax credit policy in 2009 - and was just a continuation of the housing bust.

The YoY change in new home sales in late 2022 and early 2023 would usually suggest a possible recession.  However, another feature of new home sales is that it usually leads the economy out of recession (an exception was following the housing bust, but I was able to correctly anticipate the recovery anyway).

Because of the low level of existing home inventory, new home sales are starting to pick up, and that suggests a possible recovery!

Heavy Truck Sales
Another indicator I like to use is heavy truck sales.  This graph shows heavy truck sales since 1967 using data from the BEA. The dashed line is the April 2023 seasonally adjusted annual sales rate (SAAR). Note: "Heavy trucks - trucks more than 14,000 pounds gross vehicle weight."

Heavy truck sales were at 563 thousand SAAR in April, up from 486 thousand in March, and up 23% from 456 thousand SAAR in April 2022.  

Usually, heavy truck sales decline sharply prior to a recession, however sales were strong in April.

A short term leading indicator I'll be watching is the 4-week average of unemployment claims.

This has increased recently and if this increases further, we might be entering an employment recession.

The FOMC is in a tough situation.  The primary transmission mechanisms for Fed policy are usually housing followed by vehicle sales (a distant second).  This time vehicle sales were more suppressed by supply chain issues (a pandemic distortion) and have increased recently, and it appears new home sales might have bottomed!

Fed policy is currently restrictive, and keeping policy at this level will likely bring inflation back to the target of 2%.   Further rate increases would likely be a policy error and increase the odds of a recession.  The current target range for the federal funds rate is 5 to 5-1/4 percent, well above r* + target inflation.   Note: r* is an estimate of the real rate of interest.

My sense is growth will stay sluggish in 2023, but the economy will avoid recession.   Monetary policy is restrictive, the fiscal policy will be a slight drag if the recent agreement passes the House and Senate.   Vehicle sales will probably increase this year, but new home sales will stay low - but increase year-over-year for the remainder of 2023.

There is downside risk if the FOMC overtightens, or Congress forces a debt default (although this seems less likely now).  Since two of the best leading indicators are suggesting a recession, I'll stay on recession watch, and I might change my view on a recession in a few months. 

Housing May 29th Weekly Update: Inventory Increased 2.1% Week-over-week

by Calculated Risk on 5/29/2023 09:15:00 AM

Altos reports that active single-family inventory was up 2.1% week-over-week.

Altos Home Inventory Click on graph for larger image.

This inventory graph is courtesy of Altos Research.

As of May 26th, inventory was at 433 thousand (7-day average), compared to 424 thousand the prior week.   

Year-to-date, inventory is down 11.8%.  And inventory is up 6.8% from the seasonal bottom six weeks ago.

The second graph shows the seasonal pattern for active single-family inventory since 2015.
Altos Home Inventory
The red line is for 2023.  The black line is for 2019.  Note that inventory is up from the previous two years (the record low was in 2022), but still well below normal levels.

Inventory was up 21.1% compared to the same week in 2022 (last week it was up 25.4%), and down 53.5% compared to the same week in 2019 (last week down 53.3%). 

It appears likely inventory will be down year-over-year in late June.

Mike Simonsen discusses this data regularly on Youtube.

Sunday, May 28, 2023

Hotels: Occupancy Rate Down 1.5% Year-over-year

by Calculated Risk on 5/28/2023 10:32:00 AM

U.S. hotel performance increased from the previous week and showed improved comparisons year over year, according to STR‘s latest data through 20 May.

14-20 May 2023 (percentage change from comparable week in 2022):

Occupancy: 67.5% (-1.5%)
• Average daily rate (ADR): US$158.53 (+3.6%)
• Revenue per available room (RevPAR): US$106.98 (+2.1%)
emphasis added
The following graph shows the seasonal pattern for the hotel occupancy rate using the four-week average.

Hotel Occupancy RateClick on graph for larger image.

The red line is for 2023, black is 2020, blue is the median, and dashed light blue is for 2022.  Dashed purple is for 2018, the record year for hotel occupancy. 

The 4-week average of the occupancy rate is slightly above the median rate for the period 2000 through 2022 (Blue).

Note: Y-axis doesn't start at zero to better show the seasonal change.

The 4-week average of the occupancy rate will move mostly sideways for the next several weeks until the summer travel season.

Saturday, May 27, 2023

Real Estate Newsletter Articles this Week: "Multi-Family Delinquencies Increased"

by Calculated Risk on 5/27/2023 02:11:00 PM

At the Calculated Risk Real Estate Newsletter this week:

New Home Sales at 683,000 Annual Rate in April

Two Key Housing Themes: Low Inventory and Few Distressed Sales

Total Housing Completions will Likely Decrease Slightly in 2023; The Mix will Change

Fannie and Freddie Serious Delinquencies in April: Single Family Declined, Multi-Family Increased

Final Look at Local Housing Markets in April

This is usually published 4 to 6 times a week and provides more in-depth analysis of the housing market.

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Schedule for Week of May 28, 2023

by Calculated Risk on 5/27/2023 08:11:00 AM

The key report scheduled for this week is the May employment report.

Other key reports include the March Case-Shiller house prices, May ISM Manufacturing and May Vehicle Sales.

----- Monday, May 29th -----

All US markets will be closed in observance of Memorial Day.

----- Tuesday, May 30th -----

Case-Shiller House Prices Indices 9:00 AM: S&P/Case-Shiller House Price Index for March.

This graph shows the year-over-year change in the seasonally adjusted National Index, Composite 10 and Composite 20 indexes through the most recent report (the Composite 20 was started in January 2000).

9:00 AM: FHFA House Price Index for March 2022. This was originally a GSE only repeat sales, however there is also an expanded index.

10:00 AM: Dallas Fed Survey of Manufacturing Activity for May.

----- Wednesday, May 31st -----

7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

9:45 AM: Chicago Purchasing Managers Index for May.

Job Openings and Labor Turnover Survey10:00 AM ET: Job Openings and Labor Turnover Survey for April from the BLS.

This graph shows job openings (black line), hires (purple), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

Jobs openings decreased in March to 9.6 million from 10.0 million in February. The number of job openings (black) were down 20% year-over-year.

2:00 PM: the Federal Reserve Beige Book, an informal review by the Federal Reserve Banks of current economic conditions in their Districts.

----- Thursday, June 1st -----

8:15 AM: The ADP Employment Report for May. This report is for private payrolls only (no government). The consensus is for 160,000 payroll jobs added in May, down from 296,000 in April.

8:30 AM: The initial weekly unemployment claims report will be released.  The consensus is for 234 thousand initial claims, up from 229 thousand last week.

Vehicle SalesAll day: Light vehicle sales for May. The consensus is for light vehicle sales to be 14.5 million SAAR in May, up from 14.3 million in April (Seasonally Adjusted Annual Rate).

This graph shows light vehicle sales since the BEA started keeping data in 1967. The dashed line is the sales rate for last month.

10:00 AM: ISM Manufacturing Index for May. The consensus is for the ISM to be at 47.0, down from 47.1 in April.

10:00 AM: Construction Spending for April. The consensus is for a 0.2% increase in construction spending.

----- Friday, June 2nd -----

Employment Recessions, Scariest Job Chart8:30 AM: Employment Report for May.   The consensus is for 180,000 jobs added, and for the unemployment rate to increase to 3.5%.

There were 253,000 jobs added in April, and the unemployment rate was at 3.4%.

This graph shows the jobs added per month since January 2021.

Friday, May 26, 2023

May 26th COVID Update: New Pandemic Lows for Deaths and Hospitalizations

by Calculated Risk on 5/26/2023 09:01:00 PM

Mortgage RatesNote: Mortgage rates are from and are for top tier scenarios.

Due to changes at the CDC, weekly cases are no longer updated.

After the first few weeks, the pandemic low for weekly deaths had been the week of July 7, 2021, at 1,690 deaths (until recently).  

For COVID hospitalizations, the previous low was 9,821 (until four weeks ago).

COVID Metrics
Deaths per Week2778949≤3501
1my goals to stop weekly posts,
2Weekly for Currently Hospitalized, and Deaths
🚩 Increasing number weekly for Hospitalized and Deaths
✅ Goal met.

COVID-19 Deaths per DayClick on graph for larger image.

This graph shows the weekly (columns) number of deaths reported.

For deaths, I'm currently using 3 weeks ago for "now", since the most recent two weeks will be revised significantly.

Fannie and Freddie Serious Delinquencies in April: Single Family Declined, Multi-Family Increased

by Calculated Risk on 5/26/2023 01:08:00 PM

Today, in the Calculated Risk Real Estate Newsletter: Fannie and Freddie Serious Delinquencies in April: Single Family Declined, Multi-Family Increased

Brief excerpt:

Single-family serious delinquencies continued to decline in April, however, multi-family serious delinquencies are now increasing.
Freddie Multi-Family Seriously Delinquent RateFreddie Mac reports that multi-family delinquencies increased to 0.19% in April, up from 0.08% in April 2022..

This graph shows the Freddie multi-family serious delinquency rate since 2012. Rates were still high in 2012 following the housing bust and financial crisis.

The multi-family rate increased following the pandemic and has increased recently as rent growth has slowed, vacancy rates have increased, and interest rates have increased sharply. This will be something to watch as rents soften.
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Q2 GDP Tracking: Around 1% to 2%

by Calculated Risk on 5/26/2023 11:58:00 AM

From BofA:

Overall, today's higher than expected personal income and outlays and durable goods print along with the wider than expected advance goods trade deficit decreased our 2Q US GDP tracking from 1.1% q/q saar to 0.9% q/q saar. [May 26th estimate]
emphasis added
From Goldman:
Personal income increased as expected and personal spending increased by more than expected in April. ... Both headline and core durable goods orders increased against consensus expectations for declines. The goods trade deficit widened significantly more than expected in April, driven by a large decline in exports and a more modest rise in imports. We boosted our Q2 GDP tracking estimate by one tenth to +2.1% (qoq ar). [May 26th estimate]
And from the Altanta Fed: GDPNow
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2023 is 1.9 percent on May 26, down from 2.9 percent on May 17. After recent releases from the US Census Bureau, the US Bureau of Economic Analysis, and the National Association of Realtors, decreases in the nowcasts of second-quarter real net exports and second-quarter real gross private domestic investment growth were partially offset by increases in the nowcasts of second-quarter real personal consumption expenditures growth and second-quarter real government spending growth. [May 26th estimate]

PCE Measure of Shelter Still Accelerating YoY

by Calculated Risk on 5/26/2023 08:58:00 AM

Here is a graph of the year-over-year change in shelter from the CPI report and housing from the PCE report this morning, both through April 2023.

ShelterCPI Shelter was up 8.1% year-over-year in April, down from 8.2% in March. 

Housing (PCE) was up 8.4% YoY in April, up from 8.3% in March.

Since asking rents are soft and Year-over-year Rent Growth Continues to Decelerate this means both CPI and PCE measures are currently overstating actual inflation.

Personal Income increased 0.4% in April; Spending increased 0.8%

by Calculated Risk on 5/26/2023 08:40:00 AM

The BEA released the Personal Income and Outlays report for April:

Personal income increased $80.1 billion (0.4 percent at a monthly rate) in April, according to estimates released today by the Bureau of Economic Analysis. Disposable personal income (DPI) increased $79.4 billion (0.4 percent) and personal consumption expenditures (PCE) increased $151.7 billion (0.8 percent).

The PCE price index increased 0.4 percent. Excluding food and energy, the PCE price index increased 0.4 percent. Real DPI increased less than 0.1 percent in April and Real PCE increased 0.5 percent; goods increased 0.8 percent and services increased 0.3 percent.
emphasis added
The April PCE price index increased 4.4 percent year-over-year (YoY), up from 4.2 percent YoY in March, and down from the recent peak of 7.0 percent in June 2022.

The PCE price index, excluding food and energy, increased 4.7 percent YoY, up from 4.6 percent in March, and down from the recent peak of 5.4 percent in February 2022.

The following graph shows real Personal Consumption Expenditures (PCE) through April 2023 (2012 dollars). Note that the y-axis doesn't start at zero to better show the change.

Personal Consumption Expenditures Click on graph for larger image.

The dashed red lines are the quarterly levels for real PCE.

Personal income was at expectations, and PCE was above expectations.

Inflation was above expectations.